Investment norms eased for VC cos

BANGALORE: The Government has eased the investment norms for venture capital

funding by removing the ceiling of 40 per cent imposed on investment by venture

capital funds (VCFs) in the equity capital of companies besides permitting VCFs

to invest up to 25 per cent of the total funds raised by them in a single

undertaking. This means if a VCF has a fund base of Rs 100 crore, it can only

invest upto Rs 25 crore in a new company. If the company needs more equity, it

will have to tap other VCFs. If the company is satisfied with a capital of just

Rs 25 crore, then the VCF will end up holding 100 per cent of the company's

equity.

The Finance Ministry has inserted a new Section 10 (23FA) in the Income-Tax

Act, 1961, under the Finance Act, 1999, to provide for exemption of any income

by way of dividends or long term capital gains of a VCF or a venture capital

company (VCC) from investments made on or after April 1, 1999, by way of equity

shares in a VC undertaking.

To avail this exemption, a VCF or a VCC will need the approval of the Union

Government. The approval shall, at any one time, have effect for such assessment

year or years not exceeding three assessment years. The Government also has the

power to withdraw the approval if the VCF's fail to adhere to the investment

norms stipulated by the Finance Ministry.

The liberalized norms are aimed at encouraging venture capital

entrepreneurship with a view to boosting investments in sectors where the risk

and returns are high, and normally banks do not take exposure in these areas.

The sectors that have been notified by the Government include software,

information technology, among others. The VCF's have to be registered with the

SEBI under Section 3 of the SEBI Act, 1992, to avail of the tax benefits. The

tax break on dividend and capital gains will be allowed to all VCF's, including

those based abroad. This was announced in the last budget.